What Is a Credit Score? Debunking Common Myths

Let’s say you’re finally ready to buy your dream home or a sleek, pricey new car. You’ve saved diligently, but then, you hit a roadblock: your credit score. But you find yourself worried – you barely know what a credit score is, much less how to raise it. A survey from badcredit.org found that one in three Americans don’t even know their own credit score. If you’ve ever asked yourself, “what is a credit score?”, keep reading – we’ll walk you through it, including misconceptions and helpful tips.

How Credit Scores Are Calculated

A credit score is how your credit is represented to lenders, informing them of how much of a liability you are as a borrower. A FICO® credit score, which is used by 90% of lenders, comes in the form of a three-digit number between 300-850. When it comes to FICO® Scores, the following is included:

• Payment History (35%) – On-time payments on credit cards, loans, and other debts are the most pressing factor when determining a credit score.
• Credit Utilization (30%) – This is the amount of credit used compared to the total available credit.
• Length of Credit History (15%) – A longer credit history generally indicates a more stable financial track record.
• Credit Mix (10%) – Having a variety of credit accounts, like credit cards, loans, and mortgages, all demonstrate responsible credit management.
• New Credit (10%) – Frequent applications for new credit can negatively impact your score.

Your FICO® Score is calculated based on the information in your credit report and is then provided by the three major credit bureaus: Equifax, Experian, and TransUnion. The bureaus collect identifying information such as your name, birth date, and address as well as credit information from lenders and public records, creating custom credit reports for each consumer. Credit reports and FICO® Scores will differ a bit between bureaus as their scoring models are not identical.

Lenders use credit scores to determine loan eligibility and set interest rates for future credit accounts. A higher score means you are less likely to miss a payment, which can help you secure better rates and terms.

Debunking Common Myths

Now that you know what a credit score is, here are a few things a credit score isn’t.

Myth 1: “Only loans affect your credit score.”

Your rent payments, utility bills, and even cell phone bills can be reported to credit bureaus (with your consent). Sometimes, however, you’ll need an outside group to help you opt-in to reporting certain facets of your finances. These are called “rent reporting services.”

Myth 2: “Checking your credit score hurts it.”

Checking your own credit score through legitimate, authorized channels, like AnnualCreditReport.com, does not harm it. That’s because these are “soft inquiries,” which do not impact your credit score. Other soft inquiries include an employer verifying your credit or getting pre-authorized by a credit card.

Myth 3: “Paying off your credit cards completely is bad.”

While maintaining some credit utilization is beneficial, paying off debt is generally a positive step. However, carrying a low credit balance and paying this balance on time indicates to lenders that you know how to have credit responsibly and have the funds to pay it off.

Myth 4: “Only negative information impacts your score.”

Positive credit behavior, like on-time payments and low utilization, are the hallmarks of a good score. While it might seem like negative information is hard to combat, just remember that slow and steady wins the race – with consistency, you can lessen the impact of that negative information.

Tips for Improving Your Credit Score

Keeping a credit score elevated seems complicated, but it’s actually pretty easy. The main thing you need to focus on is making on-time payments as consistently as possible, preferably every month. A few other tips include:

• Keeping credit utilization low
• Maintaining a diverse credit mix by having different credit accounts
• Limiting applications for new credit, and focusing on existing credit
• Monitoring your credit report regularly

If you find credit score maintenance to be overwhelming, don’t worry. There are credit counseling services that can help you learn how to get back on the right track. Additionally, you can consider a tool like MyFICO®, which can assist in monitoring your credit score in a more organized, methodical fashion.

Disclaimer: This content is sponsored by MyFICO® and is provided for informational purposes only. The information shared here is not intended to serve as financial, legal, or credit-related advice. Readers are encouraged to consult with their personal financial advisors or credit professionals to assess their specific situation. To learn more about MyFICO®’s services, including credit scores and monitoring tools, please visit the MyFICO® website or reach out to a MyFICO® representative.